Year: 2018

FinCEN CDD Rule, sometimes called the Fifth Pillar of AML, became effective on May 11, 2018.

The CDD Rule has four core requirements. It requires covered financial institutions to establish and maintain written policies and procedures that are reasonably designed to (1) identify and verify the identity of customers; (2) identify and verify the identity of the beneficial owners of companies opening accounts; (3) understand the nature and purpose of customer relationships to develop customer risk profiles; and (4) conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information. – FinCEN New Release

To clarify compliance and implementation of the rule, FinCEN provided two sets of FAQs. The first was in July of 2016. The second was in April of 2018.

There were two exemptions. The first was on May 11, 2018, the guts of which is as follows:

The Beneficial Ownership Rule currently exempts covered financial institutions from the requirements to identify and verify the identity of the beneficial owner of legal entity customers at account opening to the extent that the legal entity customer opens the account for the purpose of financing insurance premiums and for which payments are remitted directly by the financial institution to the insurance provider or broker unless there is a possibility of cash refunds. This ruling provides exceptive relief to covered financial institutions from the requirements to collect and verify the beneficial owner of a legal entity customer opening such premium financing account when there is a possibility of a cash refund.

The second was a temporary relief announced on May 16, 2018, the guts of that is as follows:

… up to and including August 9, 2018… exceptive relief to covered financial institutions from the obligations of the Beneficial Ownership Requirements for Legal Entity Customers (31 CFR § 1010.230) (Beneficial Ownership Rule) with respect to certain financial products and services that automatically rollover or renew (i.e., certificate of deposit (CD) or loan accounts) and were established before the Beneficial Ownership Rule’s Applicability Date, May 11, 2018.

At the time of this writing, many large banks went through a review of the rule implementation recently, are in review, or will soon be in review by the Office of the Comptroller of the Currency, but these are not a coordinated horizontal industry-wide review. Banks are eager to find out how well they have done and how practical the reviews will be. The second relief is one of great concern for all banks, not just the big banks, because many products have automatic rollover or renewal, for which banks do not normally consider to be a new financial product or even a new account.

If you have been seeing Cookie Acceptance Notifications pop up on many global websites lately, it is precisely because this 2016 EU law, which goes into effect on May 25, 2018. The law is broad in scope, but the notifications require the site user to accept the cookies being used, which is to document the site-user of opting in to the cookie tracking. The sites are require to be able to evidence this opt-in.

The major requirement is in the title: Data Protection. The foundational principle is that the website user owns his or her personal data that the site is collecting, so, as long as the site receives acceptance to use the data, the site also is responsible for protecting the data from data breaches. Considering the ever-growing prowess of Black Hat Hackers, many sites are opting to purge the user data. Major social networking site are probably coming up with ways to anonymize user data.

This principle that the user owns the data that is being collected has other ramifications. The user can request erasure of his or her data. The user will likely be able to request all users of his or her data, however removed from the originating data collector, to provide how the data was used. All of the rights of ownership are attached to the data.

This is quite contrary to the American legal principle of privacy, which requires sites to keep the data private, but since the site owns the user’s data, it can do what it can do with any other asset it owns. The defense of the American legal principle is that much of the data collected are actually intellectual property. Take, for example, demographic information. One site may analyze my personal data and conclude that I am a social conservative while another a social liberal; the conclusion is the result of the site’s work.

The EU legal principle suggests that such work may indeed be owned by the site, but if it is derived from the user, then user has derivative ownership of those conclusions. Essentially, it recognizes that the user’s information has economic value and, therefore, the site will have to have a valid contract to use that data.

Since the law protects all EU citizens and residents and their data, it is global in nature. Also, if an American tourist logs in from the EU jurisdiction, the American is protected as well. For that matter, the American would be protected if the data is harvested from the United States but it is stored or passes through the EU jurisdiction.

Some questions remain, at least for me. Would a company legally headquartered in Ireland but its activities are in Menlo Park, California, is the company treated as an EU company, and, therefore, require data protection to all user information going through Menlo Park because the financial results of that information is reported to the Irish tax authorities?

How about counter-terrorism efforts?

Or, does the public figure have an economic right to his or biography published by a traditional publisher of hardcover books?

FinCEN CDD Rule is the shorthand for Customer Due Diligence Requirements for Financial Institutions, which FIs were supposed to have implemented by May 11, 2018. The requirement is to obtain beneficial ownership information, financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity, among others. At the time of this publication, May 16, 2018, the requirement also includes the collection of beneficial ownership information during product or service renewals, such as loan renewals and certificates of deposit rollovers. FIN-2018-G001 FAQ Regarding CDD Requirement for FIs, pages 9 and 10. This is the most controversial definition of a new product or service. Practically speaking, it means a short term 1-month CD will trigger the need to collect a certification of beneficial ownership, which also includes the work of due diligence to support the certification. There is no provision to apply this on a risk basis, which means the pensioner in Wichita and a Middle Eastern correspondent bank will be treated the same for the purposes of this requirement. Obviously, FIs as awaiting any guidance on the enforcement strategy from regulators.

Update: On May 16, 2018, at around 6pm, FinCEN delayed the enforcement of this rule. Due to the unexpected interpretation by FinCEN, FIs were not ready to consider rollovers as purchase of a new financial product. Realizing that they provided guide far too late for FIs to comply, FinCEN is providing a 90-day limited exceptive relief. Also, as, what seems to be, a jab at FIs sounding the alarm, FinCEN added:

Consistent with the definition of “account” in the Customer Identification Program
(CIP) rules and subsequent interagency guidance, each time a loan is renewed or
a certificate of deposit is rolled over, the bank establishes another formal banking
relationship and a new account is created…

FinCEN understands that some covered institutions have not treated such rollovers or renewals as new accounts and have established automatic processes to continue the banking relationship with the customer.

You have noticed that this blog has been relatively quiet in the past year. I had ambitious plans for this blog but the demands of my work dealing with the real world problems, that are the subject of this blog, has kept me from providing valuable and quality new content. Even still, this blog gets quite a bit of traffic. That is because this site has been primarily focused on educating new Anti-Money Laundering Specialists. The broader topic is Financial Crimes, which would also include Fraud, Bribery, and Sanctions. In terms of quality, I tried to provide the most important aspect of a term, laying aside nuances. This method has been very successful in educating the newly initiated Compliance Officer.

However, there has been a need to improve all aspects of this blog. I decided early on to focus on the educational aspect over all others. This meant that I would avoid nuances and technical correctness. Even with this reduced scope in audience, I have not been able to keep up.

Here is where the community can help each other. If you like sharing your knowledge, and like the idea of creating posts that answer questions people ask search engines, please, contact me. You can be part of the solution.

In the meantime, I will think about what I can do to either improve this blog or do something else with this content that will be of value.

Congratulations to those of you who have become certified or awarded degrees in the Financial Crimes Compliance field in the past year.